Summary Article on Tech Bubble

Griffin, John M, Harris, Jeffery H, Shu, Tao, Topaloglu, Selim, 2011. Who Drove the Tech Bubble?, The Journal of Finance, 66, 1251-1290.

This paper directly examines the relative roles of individual and institutional trading during the rise and fall of technology stocks from January 1997 to December 2002. Overall, the data provided suggests that the most sophisticated market participants actively purchased technology stocks during the run-up and quickly reversed course in March 2000, driving the collapse. Individual investors actively bought during both the run-up and particularly the collapse.

From January 1997 to March 2000, both institutions and individuals actively purchased technology shares, however institutional buying exceeded the sum of individual purchases. During March 2000, institutional investors quickly pulled capital out of the market, while individual investors continued to buy. Institutional investors also drive the run-up of individual technology stocks, particularly in large stocks. Individuals, in contrast, purchase large amounts following individual stock peaks and during the year following the market peak in March 2000.

In contrast to the explanation that institutions drove prices higher with a belief in future growth opportunities, the authors find that institutions trade in the direction of clear mispricing in a small sample of equity carve-outs. The results challenge the view that sophisticated investors consistently move against mispricing, which is a cornerstone of market efficiency. The authors also find evidence inconsistent with share supply restrictions and lockups being the sole cause of the bubble.

The authors describe three general paths in the bubble literature. The first path recognizes that some agents may trade irrationally but argues that such trading will not significantly affect prices as sophisticated traders quickly trade against irrational agents to eliminate deviations. The second path considers frictions, such as...